Deutsche Bank Cuts Estimates, Price Target On City National (CYN) On Loan Losses

January 5, 2009 11:10 AM EST

Deutsche Bank said the biggest issue U.S. banks will face in 2009 is loan losses. The firm expects commercial bank loan losses for the industry to increase from 1.5% (3Q08) to 3% by the end of 2010. They said City National (NYSE: CYN) will be one of the banks hit and lowered estimates on the stock today to reflect this view.

The firm lowered Q4 EPS estimates on City National by 10 cents to $0.60, 2009 $1.70 to $1.75 and lowered 2010 EPS estimates by 55 cents to $3.95, to reflect expectations of higher loan losses. The firm also lowered its price target on City National from $47 to $43.

The firm said, "We now look for 2009 net charge-offs to be double the level of 2008. This implies that C&I and CRE (roughly 2/3rds of loans) see an increase in net loan charge-offs-to-loans from 80bp in 2008 to 170bp in 2009. This reflects an expectation that industry C&I losses will peak at 2.5%, that core CRE losses will peak at 1.5%, and that CRE construction losses will peak at 4.5%. We have given City National the benefit of the doubt on underwriting given its operating history and lack of expansion via merger, which accounts for below industry charge-off levels (1.60% net loan charge-offs-to-loans forecasted vs. 1.75% net loan charge-offs-to-loans based on industry averages, and no losses assumed for residential mortgage or home equity)."

The firm maintains a Hold rating on City National. They said a rebound is unlikely until 2H09 at the earliest.

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